Shein listed in Hong Kong on 1 September. Four weeks later it published its first set of results as a public company, and the market read them in a single morning.
Adjusted net profit for the second quarter was 228 million dollars, down 67 per cent on the year before. The net margin fell from 6.2 per cent to 2.1 per cent. Revenue grew 0.9 per cent. Jefferies calculated that earnings had landed more than 10 per cent below the bottom of the range the company’s own prospectus implied.
The shares fell as much as 14 per cent to a record low of HK$31.44, which left the company worth roughly 17 billion dollars against about 26 billion at the time of the debut. Measured from the offer price of HK$48.56, the stock had given up a little over a quarter of its value in under a month.
The reasons given are specific and largely external. Conflict in the Middle East pushed up jet fuel and air freight, which matters more to Shein than to almost any comparable retailer because the model depends on flying cheap clothes directly to individual shoppers rather than shipping them in containers to warehouses. European sales dropped sharply after the company raised prices and cut online advertising ahead of the three euro fee the European Union applied to low value e-commerce parcels from 1 July. The United States had already closed its own duty-free channel for small parcels. Shein has said the European measure could bite harder than the American one did.
None of this appeared overnight. The fuel costs, the European fee and the end of de minimis in the United States were all known, dated and discussed well before the prospectus was printed.
Which is the part worth sitting with.
There is a version of opening a cafe where the landlord offers you the lease at a good rate and the street is suddenly busy and the money is available this month and not next, so you take it, and you open, and you spend the first quarter finding out in public which parts of your kitchen do not work. The window was genuinely open. That was never the question. The question was whether the thing going through it was finished.
Listing is the most expensive possible setting in which to learn that your cost base moves with somebody else’s war. Before 1 September, a bad margin quarter was a conversation with existing shareholders. After it, the same quarter is a price, a headline, a market capitalisation and a permanent entry in the record.
Shein’s chair and chief executive Yangtian Xu set out the response the day before the numbers landed: more inventory held inside Europe, and a push into higher priced clothing to lift profitability. Both are sensible and both are slow. Stock positioned in Europe takes the aeroplane out of the equation for the goods it covers. Charging more for better garments changes what the brand is for, which is a multi-year proposition rather than a quarterly fix.
The company built something genuinely formidable. A global apparel operation assembled out of five dollar dresses, ten dollar jeans and permanent discounting is not an accident, and the machinery that puts a garment on a plane the week it is designed remains the fastest in the industry.
The timing is what will be studied. Good businesses are taken public all the time in the middle of a repair job, and the repair proceeds anyway.
It just proceeds with the lights on and the door open.
Source: Reuters, “Shares of fast-fashion platform Shein fall 6% after quarterly profit slides 67%”
